Double declining balance depreciation is an accelerated depreciation method. In this, the depreciation rate is twice the rate used in the straight-line method. (You can multiply it by 100 to see it as a percentage.) This is also called the straight line depreciation rate—the percentage of an asset you depreciate each year if you use the straight line method.

The difference is that DDB will use a depreciation rate that is twice that (double) the rate used in standard declining depreciation. If the beginning book value is equal (or almost equal) with the salvage value, don’t apply the DDB rate. Instead, compute the difference between the beginning book value and salvage value to compute the depreciation expense. Tax write-offs help you offset the cost of buying an asset by giving you more money back early on.

1. This is most frequently the case for things like cars and other vehicles but may also apply to business assets like computers, mobile devices and other electronics.
2. For instance, if an asset’s market value declines faster than anticipated, a more aggressive depreciation rate might be justified.
3. The MACRS method for short-lived assets uses the double declining balance method but shifts to the straight line (S/L) method once S/L depreciation is higher than DDB depreciation for the remaining life.
4. Like the double declining balance method, the sum-of-the-years’ digits method is another accelerated depreciation method.

The underlying idea is that assets tend to lose their value more rapidly during their initial years of use, making it necessary to account for this reality in financial statements. He has a CPA license in the Philippines and a BS in Accountancy graduate at Silliman University. This approach is reasonable when the utility of an asset is being consumed at a more rapid rate during the early part of its useful life. It is also useful when the intent is to recognize more expense now, thereby shifting profit recognition further into the future (which may be of use for deferring income taxes). Since the fixtures have not yet depreciated, the book value of the fixtures at the beginning of the first year is $100,000.

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Under the DDB depreciation method, the equipment loses $80,000 in value during its first year of use, $48,000 in the second and so on until it reaches its salvage price of $25,000 in year five. The DDB depreciation method is best applied to assets that quickly lose value in the first few years of ownership. This is most frequently the case for things like cars and other vehicles but may also apply to business assets like computers, mobile devices and other electronics. This method is an essential tool in the arsenal of financial professionals, enabling a more accurate reflection of an asset’s value over time in balance sheets and financial statements.

Cons of the Double Declining Balance Method

The DDB method involves multiplying the book value at the beginning of each fiscal year by a fixed depreciation rate, which is often double the straight-line rate. This method results in a larger depreciation expense in the early years and gradually smaller expenses as the asset ages. It’s widely used in business accounting for assets that depreciate quickly.

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The content on this website is provided “as is;” no representations are made that the content is error-free. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. Even though year five’s total depreciation should have been $5,184, only $4,960 could be depreciated before reaching the salvage value of the asset, which is $8,000. Continuing with the same numbers as the example above, in year 1 the company would have depreciation of $480,000 under the accelerated approach, but only $240,000 under the normal declining balance approach.

In the final year, the asset will be further depreciated by $2000, ignoring the rate of depreciation. After the first year, we apply the depreciation rate to the carrying value (cost minus accumulated depreciation) of the asset at the start of the period. We can incorporate use of the double-declining balance method this adjustment using the time factor, which is the number of months the asset is available in an accounting period divided by 12. However, using the double declining depreciation method, your depreciation would be double that of straight line depreciation.

For example, the depreciation expense for the second accounting year will be calculated by multiplying the depreciation rate (50%) by the carrying value of $1750 at the start of the year, times the time factor of 1. To calculate the depreciation expense of subsequent periods, we need to apply the depreciation rate to the laptop’s carrying value at the start of each accounting period of its life. As you can see, both methods end up with the same total accumulated depreciation. The only difference between a straight-line depreciation and a double declining depreciation is the rate at which the depreciation happens.

The company would deduct $9,000 in the first year, but only $7,200 in the second year. Another thing to remember while calculating the depreciation expense for the first year is the time factor. The following section explains the step-by-step process for calculating the depreciation expense in the first year, mid-years, and the asset’s final year. Unlike the straight-line method, the double-declining method depreciates a higher portion of the asset’s cost in the early years and reduces the amount of expense charged in later years.

This method of depreciation is especially useful for assets that deteriorate more rapidly in their first few years of use, as the method will reduce deductions as the years go on. As a result, companies will typically choose to use this method of depreciation when dealing with assets that gradually lose value over their useful life. Given the nature of the DDB depreciation method, it is best reserved for assets that depreciate rapidly in the first several years of ownership, such as cars and heavy equipment. By applying the DDB depreciation method, you can depreciate these assets faster, capturing tax benefits more quickly and reducing your tax liability in the first few years after purchasing them.

This method falls under the category of accelerated depreciation methods, which means that it front-loads the depreciation expenses, allowing for a larger deduction in the earlier years of an asset’s life. Depreciation is the act of writing off an asset’s value over its expected useful life, and reporting it on IRS Form 4562. The double declining balance method of depreciation is just one way of doing that. Double declining balance is sometimes also called the accelerated depreciation method. Businesses use accelerated methods when having assets that are more productive in their early years such as vehicles or other assets that lose their value quickly. Companies use depreciation to spread the cost of an asset out over its useful life.

Depreciation in the year of disposal if the asset is sold before its final year of useful life is therefore equal to Carrying Value × Depreciation% × Time Factor. No depreciation is charged following the year in which the asset is sold. Calculating DDB depreciation may seem complicated, but it can be easy to accomplish with accounting software. To see which software may be right for you, check out our list of the best accounting software or some of our individual product reviews, like our Zoho Books review and our Intuit QuickBooks accounting software review. In contrast to straight-line depreciation, DDB depreciation is highest in the first year and then decreases over subsequent years.

Using the 200% Double Declining Balance Depreciation Method

By front-loading depreciation expenses, it offers the advantage of aligning with the actual wear and tear pattern of assets. This not only provides a more realistic representation of an asset’s condition but also yields tax benefits and helps companies manage risks effectively. Suppose a company purchases a piece of machinery for $10,000, and the estimated useful life of this machinery is 5 years. In this scenario, we can use the formula to calculate the depreciation expense for the first year. An asset for a business cost $1,750,000, will have a life of 10 years and the salvage value at the end of 10 years will be $10,000. You calculate 200% of the straight-line depreciation, or a factor of 2, and multiply that value by the book value at the beginning of the period to find the depreciation expense for that period.

And so on—as long as you’re drinking only half (or 50%) of what you have, you’ll always have half leftover, even if that half is very, very small. Next year when you do your calculations, the book value of the ice cream truck will be $18,000. Insights on business strategy and culture, right to your inbox.Part of the business.com network. Get started with Taxfyle today, and see how filing taxes can be simplified. Set your business up for success with our free small business tax calculator.

Can I switch from the Double Declining Balance Method to another depreciation method?

You can calculate the double declining rate by dividing 1 by the asset’s life—which gives you the straight-line rate—and then multiplying that rate by 2. Let’s assume that FitBuilders, a fictitious construction company, purchased a fixed asset worth $12,500 on Jan. 1, 2022. The company estimates that its useful life will be five https://business-accounting.net/ years and its salvage value at the end of its useful life would be $1,250. Employing the accelerated depreciation technique means there will be smaller taxable income in the earlier years of an asset’s life. (For example, an apple tree that produces fewer and fewer apples as time goes on.) Taxes must be paid on those earnings.